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­­­Economic efficiency and the evolution of political regimes: a theoretical model of interdependence, cross-country and dynamical analysis

Priority areas of development: humanitarian
2017
The project has been carried out as part of the HSE Program of Fundamental Studies.

Goal of research: To reveal the mechanisms and the nature of mutual dynamical relationships between efficiency of state-society systems (efficiency due to total factor productivity) and the process of political regime consolidation and transformation.

Methodology:

We use an interdisciplinary approach: the conceptual framework is set by new institutionalism and expanded with social orders and social capital theories. We employ mathematical modeling, mainly – dynamical systems analysis (both analytically and through numerical experiments). We use macroeconomic approaches to production function theory and expand on those with our own frontier-generated production function. We also use many methods of empirical data analysis: Data Envelopment Analysis to estimate the production function; clustering, principal component analysis, ANOVA, correlations, multivariate regressions and survival analysis to look into the relationships between economic efficiency, political institutions and political regimes.

Empirical base of research:

We use existing sources of data to measure a number of variables:

  • overall regime characteristics: Polity IV variables and “Varieties of Democracy” (V-DEM) variables;
  • institutional quality and its dynamics: Bayesian Corruption Index, Index of Political Corruption («Varieties of Democracy»), Corruption Perceptions Index («Transparency International»), Control of Corruption Index (Worldwide Governance Indicators);
  • property rights protection: Legal Structure and Security of Property Rights Index (Fraiser Institute), Property Rights Index (Heritage Foundation); Rule of Law,  Government Effectiveness and Regulatory Quality (Worldwide Governance Indicators);
  • state capacity: number of police officers per 10 000 population; shadow economy share;

To estimate TFP, we use a number of macroeconomic variables from the IMF database:

  • General government capital stock, % of GDP;
  • General government capital stock, PPP, Constant 2005 Dollars;
  • Private capital stock, % of GDP.

And from the World Bank database:

  • Labor force, total.

Results of research:

  • We’ve created a mathematical model for resource production and reallocation. The model represents the relationships between economic efficiency (total factor productivity), on the one hand, and social capital and institutional quality, on the other hand.
  • We’ve found empirical evidence that higher economic efficiency (measured with total factor productivity) facilitates regime consolidation in democracies. Mathematical simulations support our findings.
  • We’ve analyzed the impact of economic efficiency on institutional development. We show that certain TFP levels are necessary (yet not sufficient) for a qualitative shift in political institutions.
  • We’ve proved that it is necessary to account for state capacity (i.e. coercive power) when looking into institutional development and TFP. We’ve shown empirically that “TFP development traps” exist, when increases in coercive power at low efficiency levels impede further development.
  • We’ve developed a new method of TFP estimation for a three-factor production function which includes public capital, private capital and labor.
  • We’ve calculated TFP estimates for 103 countries in the period between 1960 and 2013. We’ve shown practical ways to solve the issues with missing data points.

Level of implementation,  recommendations on implementation or outcomes of the implementation of the results

The findings presented within the project may be used to facilitate the work of government organizations (specifically analytical departments) and think tanks that analyze policy decisions.

Possible fields of application include macroeconomic analysis, analysis of institutional quality, sustainable development forecasting and stability forecasting.